When, and if, freedom progresses in the world, as states hopefully loosen their grip on societies, this process is unlikely to happen evenly. Indeed, a society could conceivably turn libertarian while all the rest of the world continues to practice statist interventionism to various degrees.
If this happened, how would this libertarian “Freelandia” fare? In a world of statist nations, able to print money, tax, and manipulate their currencies, this is an important question. Instead of examining only Freelandia’s state of freedom, it is important to review the relationships between Freelandia and the unfree world around it. Libertarian theory and Austrian economics point both to the risks and the rewards for this libertarian society.
Minarchism in an Unfree World
To start, Freelandia would probably be a minarchist society rather than an anarcho-capitalist one. In other words, it would have a minimal state, because it would be difficult in practice for an anarcho-capitalist (i.e., stateless) society to appear today other than ex nihilo. Freelandia’s libertarianism would come about through a political process, like a successful libertarian secession or a libertarian electoral victory, in an existing coercive state. Freelandia would thus “inherit” public institutions. It might abolish many of them but keep others, like reduced executive and legislative branches of government, public courts, national defense, consular representation, etc.
In fact, Freelandia would inevitably need to have relationships with other states and institutions, which implies keeping certain governmental structures in place. Incidentally, for this reason also, Freelandia’s would probably need to have at least a population of tens of thousands. It could finance itself without direct or indirect taxes, by voluntary, contractual, and market-based revenue sources, such as user fees, donations, citizenship sale, etc.
Freelandia’s nightwatchman state would be responsible for the unified territorial defense of private property (and the little public property it had) against foreign aggression. But with a limited public budget, its defense against external threats could not be assumed to fully guarantee deterrence against probably stronger offensive militaries of statist neighbors with armies funded from taxpayers and debt. Therefore, Freelandia would certainly adopt a neutral position in world affairs, rejecting military alliances with other nations. Neutrality has a protective quality of its own, which is something small countries sometimes understand, but cannot always implement.
Trading with an Unfree World
Freelandia would have no central bank; it would have sound money, with a hard currency based on gold (and perhaps crypto or another commodity). Its economy would generally be “deflationary” and real wages would tend higher due to productivity increases and controlled immigration. There would thus be no malinvestments in Freelandia and economic cycles would be mild and self-correcting, but only if left to their own devices. However, it is important to note that its economy would obviously not be isolated from the typical booms and busts of the fiat-money world.
Further, Freelandia would have to follow binding international norms and legal decisions (as well as possibly illegal ones, such as sanctions, asset freezes and capital controls on myriad nations), imposed by coercive states and institutions controlling global finance and “rules” of commerce. Otherwise, its external trade would certainly be stunted, with its businesses missing out on foreign investment opportunities and market access. Freelandia would thus have difficult choices to make: it could refuse all foreign coercion and stay true to its libertarian ideals, with the significant economic and political consequences that would have in the form of exclusion from the international community. Alternatively, it could wisely adapt to the external coercive forces by giving up on certain principles, in an effort to protect private property under its jurisdiction to the best of its abilities considering the circumstances.
Freelandia would engage in free trade, regardless of the coercive trade policy of other governments on Freelandia’s exports. By slashing all tariffs, the libertarian state ensures its consumers and producers that no additional tax will be placed on goods. In Freelandia’s hard currency system, differences between the value of exports and imports would tend to self-adjust over time, according to Hume’s Price-Specie Flow Mechanism. Of course, such adjustments happen naturally in its economy, since Freelandia does not artificially inflate its currency by printing money like other nations.
When fiat-money nations print money, causing the value of their currencies to drop relative to gold, their exports become cheaper. Freelandia’s imports from these fiat-currency countries would rise, giving it a trade deficit with them. A net outflow of gold-backed currency from Freelandia ensues, leading to an increase in the value of Freelandia’s currency and a fall in prices, which would then tend to put downward pressure on wages. In a sense, Freelandia “imports” the foreign monetary expansion in the form of price competition: its producers try to become more efficient and lower costs (wages, rents) to match the artificial cheapness of the devalued imported goods.
But as foreign states inflate their currencies, foreign investors will turn to hard currency. Since Freelandia is a tax haven, these investors from fiat-money nations would tend to move their wealth to its private banks, avoiding the long inflationary and fiscal arm of their own governments. The domestic supply of loanable funds in Freelandia would rise, lowering interest rates, increasing asset prices and raising real wages. Freelandia progressively starts exporting fewer low value physical goods, as these become relatively more expensive, and instead sees expansion of long-term, capital-intensive industries and growth in high-value services (finance, tech, legal, engineering). This in turn would pull even more capital into Freelandia, driving its economy up the value chain.
Risks and Rewards of Freedom in an Unfree World
Though there are clear rewards for Freelandia in the processes briefly described here, there are also risks along the way. The economic success of Freelandia is, to some extent at least, dependent on the actions of foreign coercive governments. The timing of these processes is also key to avoiding economic difficulties, but this is not something Freelandia’s businesses and banks can easily control. Freelandia may also need to manage politically and socially sensitive periods, for instance when wages fall or unemployment rises in certain sectors as the economy transitions.
Because of Freelandia’s sound money and free trade policies, eventually its businesses would increase foreign debt and assets holdings. This would give Freelandia more economic power over other states, helping to compensate for its probable lack of military power. But its wealth would be coveted by foreign actors, nonetheless.
The above discussion shows that a society cannot be entirely free in an unfree world. Some pragmatic adaptations to foreign statism are inevitable and unavoidable by the libertarian society. Indeed, without the right political moves, the surrounding statist environment could threaten Freelandia’s free economic system. There is no possibility to guarantee that Freelandia remains libertarian; it could revert to its old statist ways through an unfortunate political reversal, perhaps because of poor understanding of both foreign and domestic risks.
However, if these risks are managed correctly, there are clear rewards for a society that chooses freedom in an unfree world. The economic success of Freelandia and the rise in the standard of living of its population relative to those living in coercive interventionist states, would over time shine a bright light on the libertarian model. Its decision to choose freedom would become an example for the world to learn from and eventually follow.
